Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Wednesday, January 18, 2012

The American health care system has his fair share of problems, a prominent one being health insurance. One particularly frustrating one is when premiums are significantly raised after a health event, so-called health insurance reclassification. Economically, this can be explained by the fact that the insured has revealed being of higher risk. But it seems self-evident that there a large room for improvement in insurance outcome if such reclassification would not occur, that is, if premiums would be almost invariant to health outcomes.

Not so, say Svetlana Pashchenko and Ponpoje Porapakkarm. Their points are that 1) with most people insured under group coverage of their employer, relatively few people are subjects to reclassification; 2) for the latter, means-tested government transfers cushion well the shock of reclassification (or loss of insurance). To come to this conclusion, they use a stochastic overlapping generation general equilibrium model, trying to match the major institutional features of US health care (including Medicaid, uninsureds, private and employer-sponsored insurance) and calibrated using Medical Expenditure Panel Survey.

Pashchenko and Porapakkarm find that introducing guaranteed renewable insurance contracts with constant premiums lowers the proportion on uninsured from 25% to 19%, the difference taking such contracts. Thus it appears that, not surprisingly, eliminating premium fluctuations is welfare-improving. But the welfare gain is very small. For one, These new insurance contracts tends to be more expensive, especially in the first years when standard insurance premiums are low for healthy (and young) people, who tend also to be more liquidity constrained. If there is no guaranteed renewable insurance contract, the government provides a similar insurance: Medicaid, which has essentially the same conditions but is free and asset-tested. The fact that it is a last resort insurance provides the right smoothing benefits for extreme cases, much like insuring premium fluctuations does. The latter is just a little broader, because there is no asset test, and hence the welfare improvement is small if it is priced actuarilly.